DENIM REBOUND ENERGIZES MILLS
Byline: Scott Malone
NEW YORK — A dramatic rebound in the denim business has set the tone for mills through the first half of the year, and executives expect the momentum to carry them through the third and fourth quarters.
While mill officials had come into the year hoping that market conditions would improve — if for no other reason than it would be hard for them to be much worse than they’d been the previous two years — the denim comeback was greater than they’d hoped.
The growth in demand, along with stabilization across much of the rest of the fabric market and the substantial restructuring last year, brought most top mills back to profitability early this year. As reported, the top 12 publicly traded textile companies engaged in the apparel business reported a collective profit in the first quarter, breaking a five-quarter streak of losses.
The surge in denim sales has had mills producing the fabric running at full capacity since January. With orders in some cases running above the levels that they can fill, mills report that they’ve been able to start raising prices for the first time in years.
While mills acknowledge that customers aren’t welcoming the price increases with open arms, the dynamic of the denim price increases — demand exceeding supply — isn’t the same as what’s been driving the increases in synthetic fibers — rising oil prices forcing fiber makers to up their rates despite weak demand. (See related story, page 19.)
At Cone Mills Corp., in Greensboro, N.C., Tom McKenna, senior vice president of merchandising and marketing, said the denim rebound has outpaced his plan.
“We had forecast market recovery on the denim side in the second half of this year. That has happened more quickly than we had anticipated,” he said. “In the first quarter, we operated in an environment of improvement, and the second quarter has been robust. On the denim side, shipments are running well ahead of last year, and the strength is improving on an almost-weekly basis.”
A number of factors have contributed to the changing supply-and-demand situation in denim. Particularly important to Cone is Levi Strauss & Co.’s completion of its inventory clearance. Last year, saddled with heavy inventories of underperforming styles, the company dramatically reduced its denim buying and focused its efforts on clearing out old stock. Early this year, inventory levels made it back down to management’s targets.
In addition, some capacity has come out of the market. Last year, Thomaston Mills shut its denim operations and Arvin Mills of India closed its U.S. warehousing facility.
Most importantly for the market, denim jeans and jackets are benefiting from brisk retail demand. Further helping U.S.-owned mills is the current fashion focus on basic silhouettes of jeans cut from high-end coated and treated fabrics.
McKenna said Cone’s production through the third quarter is already booked.
“The demand we’re being given is exceeding our expectations, and we’re working feverishly to develop ways to serve all our key customers,” he said. “We’re working very hard to get everybody covered.”
One of the steps Cone has taken to boost its capacity is canceling its traditional summer idle week — typically occurring the week of July 4 — choosing instead to run its mills without a break.
Beginning this quarter, Cone has also raised its prices on denim, though McKenna noted that after last year’s weak demand, they remain comparatively low.
“The pricing environment remains less than satisfactory,” he said. “We have secured price increases on the denim side of our business. It hasn’t been easy, but everyone realizes the levels of last year are not sustainable.”
Officials at Burlington Industries Inc. and Avondale Mills Inc. said they have also raised their denim prices. According to sources, Galey & Lord Inc. has achieved increases of about 5 percent in denim pricing.
Keith Hull, president of marketing and sales at Graniteville, S.C.-based Avondale, acknowledged that getting the increases hasn’t been easy but said they must come.
“It’s been very painful,” he said. “There’s been quite a bit of resistance, and I understand that the retailer doesn’t really care about supply and demand, cotton prices or whatever, and there are some big, powerful retailers who have dictated no increases.”
Nonetheless, the mill has raised its prices.
“The price increases, quite frankly, are not getting us back to the level we were at three or four years ago,” he contended.
The denim rebound is just the most vivid example of the overall improvement in the textile market, executives noted.
During the Asian financial crisis, U.S. mills were hammered by overseas competitors. While foreign sourcing has become a fact of life for the textile industry, the intensity of the price cutting during that period was exacerbated by the region’s economic collapse after a period of growth.
In the years leading up to the crisis, Asian companies built many new textile and apparel plants because they believed that the region’s consumer spending was on the rise and that local demand for apparel would rise at a great rate.
When the crisis struck, not only did the new demand not materialize, but spending declined. That meant that the newly built factories had their local distribution choked off. The one consumer market that remained healthy throughout this period was the U.S., so there was a great surge in the number of Asian producers trying to sell into the American market.
As the region has recovered, two things have happened. First, some companies failed, and as a result, overall capacity went down. Second, consumer spending has picked up once again, helping to bring the region’s supply and demand for apparel more in balance.
So while they continue to face competition from Far Eastern textile and apparel competitors, over the past year the game has become less desperate.
Further, the October dawn of trade parity for the Caribbean Basin and sub-Saharan Africa has given mill executives reason for optimism. The parity law requires that qualifying garments be produced with U.S.-made fabric.
A flurry of contacts between Caribbean contractors and domestic mills has resulted from the law’s passage.
“We’ve been getting some phone calls from people we haven’t heard from in a while who are looking to source garments down in the Caribbean. That’s a pretty good sign,” said James Martin, president of apparel fabrics at Dan River Inc. of Danville, Va.
Dan River doesn’t make denim and so hasn’t benefited from that resurgence in the first half of the year, but nonetheless has had a steady business, Martin said.
The company’s apparel-fabrics unit had expected flat sales for the year, and while orders have been off slightly, the unit has maintained its margins by running its factories five to six days a week, rather than seven.
Dan River is also ramping up its recent Mexican textile and apparel initiatives. The company plans to begin full-package garment production by the fourth quarter and expects to begin training the staff for that venture by mid-month.
The company also hopes to break ground on its planned Mexican mill by the end of the year.
Martin acknowledged that he finds the parity bill’s exclusion of Mexican-made fabrics frustrating, but said that his company will just have to be careful in planning what orders are produced where.
“It’s going to be a significant dynamic of how we are going to plan our production, directing what goes to our American plants and what goes to Mexico,” he said.
Avondale’s Hull also believes CBI parity will spark demand for U.S.-made fabrics. He said the company’s confidence that the bill would pass was one motivator behind its recently announced $115 million plant-modernization program.
“Every penny of that is invested in the U.S.,” he said. “Not for patriotic reasons — though we are patriotic — but because we believe this is the best place to invest.”
Avondale is one of the few major mills that has opted against both foreign production and full-package garment productions. Hull said he’d been hearing from a lot of potential customers in the weeks following the parity bill’s passage.
“A lot of our core traditional customers are bringing their production back, and we are working to increase our position with them.”
In addition, the company has been in contact with firms who have not previously worked with U.S. mills.
“Within a week of the bill’s passage, a major Asian trading company contacted me directly and said they do a lot in the Caribbean and don’t know who the U.S. mills are,” said Hull. “We invited them in and got acquainted.”
However, Hull, who declined to name the trading company in question, said that linking up with Asian partners is not a key “strategic goal” of Avondale’s.
While many in the U.S. textile industry believe that parity will be a boost for them, the enthusiasm is by no means universal.
One of the naysayers is George Shuster, chairman and ceo of Cranston Print Works Co. of Fletcher, N.C.
“I’ve been on the side that the agreement, both the Caribbean and the African side, is not a plus for the U.S.,” he said. “I don’t find that NAFTA has been a plus for the U.S. It was trumpeted as a salvation for the textile industry, and I don’t think it has proven to be that. I don’t think this agreement will, either.”
Textile executives have seen their share of hard times over the past decade, and as a result, they’ve become quite cautious in maintaining that anything will work out to their advantage.
Even those currently being boosted by the denim rebound strike a note of caution about the months ahead.
Cone’s McKenna noted that a lot of the current activity in the denim market is based on the presumption that the basic jeans business will remain strong into the fall.
“There is a lot yet to be seen out there,” he said. “Much is being done in anticipation of consumers returning to basics very strongly. We’re seeing evidence of that, but a lot of the activity out there is based on the anticipation that will happen, and it really remains to be seen.”
Similarly, there are strong signs that the overall retail environment is beginning to cool down, with many of the nation’s top chains last week reporting soft June sales. That could change the whole apparel picture.
“Things are slowing down at retail. There’s no doubt about that,” said George Henderson, chairman and chief executive officer of Greensboro-based Burlington. “We can’t operate in a void, and everything points to a slowdown at retail.”